Pinned straw:
Intelligent investor weighs on SDR bear case
Research Wrap
Little Aussie Tech stocks are having a moment. SiteMinder, an unprofitable business that helps hotels navigate the complex world of online travel agents, has a higher price-to-sales ratio than Booking.com, Expedia and Airbnb, all of which are profitable.
Even worse, the company is—perfectly legally—minimising its losses by taking some of its payroll off the income statement, which in the trade is called ‘capitalising R&D’. Strange but true: accounting standards mean companies now get to decide whether developer salaries in a software business are a cost or an asset ($).
Other than the growth, where is the Rule of 40 in this chart?
This is more expensive than, dare I say, Gentrack? I remember screening this before and the Price to sales of SDR is "through the roof"
That was timely...
Here is the opposing argument from Morningstar!
Uncovering the hidden SaaS profits
How Investment Payback can help investors identify long-term winners.
Roy van Keulen
Here we discuss why software-as-a-service companies can be structurally underestimated by the market and how investors can use this market inefficiency to find opportunities. We believe narrow moat SiteMinder (ASX:SDR) provides such an opportunity, as it is trading well below our AUD 10 per share fair value estimate.
Other companies mentioned, all overvalued, are narrow-moat Xero (ASX:XRO), with a fair value estimate of AUD 90 per share, wide-moat Technology One (ASX:TNE), with a fair value estimate of AUD 17.75, narrow-moat Objective (ASX:OCL), with a fair value estimate of AUD 5.50, and narrow-moat Hansen (ASX:HSN), with a fair value estimate of AUD 4.
We observe that it is difficult to gauge the real profitability of SaaS companies using existing accounting standards. SaaS companies are required to expense most, or all of their customer acquisition costs upfront but can only recognize the returns from these investments over the lifetime of the customer, which is often measured in terms of years or even decades. Because of this mismatch between costs and revenues, as viewed through the matching principle, returns on invested capital are calculated incorrectly.
For early-stage, fast-growing SaaS companies, this results in ROICs being artificially depressed or even negative, even when these companies may be seeing high internal rates of return on their investments. This can easily deter many traditional investors, who might mischaracterize such companies as structurally unprofitable.
Modern investors have tried to address this issue using the Rule of 40, which adds up a company's profit margins (as measured by traditional accounting) and its annual revenue growth. We find this metric better incorporates the benefits from investments, compared with ROICs. However, we also find the metric still puts too much emphasis on current profits because it cannot account for investments that take longer than one year to generate returns.
Exhibit 1: Rule of 40 Scores show little consistency over time
Average Rule of 40 scores, fiscal 2020-24.
Uncovering the hidden SaaS profits
How Investment Payback can help investors identify long-term winners.
Roy van Keulen
Here we discuss why software-as-a-service companies can be structurally underestimated by the market and how investors can use this market inefficiency to find opportunities. We believe narrow moat SiteMinder (ASX:SDR) provides such an opportunity, as it is trading well below our AUD 10 per share fair value estimate.
Other companies mentioned, all overvalued, are narrow-moat Xero (ASX:XRO), with a fair value estimate of AUD 90 per share, wide-moat Technology One (ASX:TNE), with a fair value estimate of AUD 17.75, narrow-moat Objective (ASX:OCL), with a fair value estimate of AUD 5.50, and narrow-moat Hansen (ASX:HSN), with a fair value estimate of AUD 4.
We observe that it is difficult to gauge the real profitability of SaaS companies using existing accounting standards. SaaS companies are required to expense most, or all of their customer acquisition costs upfront but can only recognize the returns from these investments over the lifetime of the customer, which is often measured in terms of years or even decades. Because of this mismatch between costs and revenues, as viewed through the matching principle, returns on invested capital are calculated incorrectly.
For early-stage, fast-growing SaaS companies, this results in ROICs being artificially depressed or even negative, even when these companies may be seeing high internal rates of return on their investments. This can easily deter many traditional investors, who might mischaracterize such companies as structurally unprofitable.
Modern investors have tried to address this issue using the Rule of 40, which adds up a company's profit margins (as measured by traditional accounting) and its annual revenue growth. We find this metric better incorporates the benefits from investments, compared with ROICs. However, we also find the metric still puts too much emphasis on current profits because it cannot account for investments that take longer than one year to generate returns.
Exhibit 1: Rule of 40 Scores show little consistency over time
Average Rule of 40 scores, fiscal 2020-24.
Source: Company filings, Morningstar estimates. HSN, OCL, SDR, WTC fiscal years end June. XRO fiscal year ends March. TNE fiscal year ends September.
We therefore propose Investment Payback as an additional metric. This metric—which calculates how long it takes for investments in sales and marketing and research and development to be paid back—better ties growth back to a company's investments and allows investors to better assess a company's internal rates of return.
Exhibit 2: Investment Payback delivers more-consistent scores over time investment
Payback scores, fiscal 2020–24.
Source: Company filings, Morningstar estimates.